Economics focus

Paul Samuelson

The last of the great general economists died on December 13th, aged 94

“I WAS reborn, born as an economist, at 8.00am on January 2nd 1932, in the University of Chicago classroom,” wrote Paul Samuelson in a memoir published earlier this month. He became probably the most influential economist of the second half of the 20th century. For his work in several branches of the dismal science he became the first American economics Nobel laureate. Through his bestselling textbook, he introduced millions of people to the subject. And right to the end he kept on mentoring the profession's brightest stars.

His actual birth took place almost 17 years earlier in the steel town of Gary, Indiana, to a family of upwardly mobile Polish immigrants. His earliest memories—of the recession of 1919-21 and strikebreaking immigrant workers from Mexico, and of the boom and bust that followed—shaped Mr Samuelson's macroeconomic views throughout his life. He approved of massive government spending to help an economy escape from recession when monetary policy can do no more. When the Obama administration introduced just that sort of stimulus this year, partly on the advice of Mr Samuelson's nephew, Larry Summers, who is Mr Obama's chief economic adviser, he was quick to approve.

Though regarded as America's leading standard-bearer for Keynesian economics, he called himself a “cafeteria Keynesian”, just picking the bits he liked. His combination of Keynesian and classical economic ideas became known as the “neoclassical synthesis”. From his chair at the Massachusetts Institute of Technology and in his column in Newsweek, the self-described “dull centrist” became a fierce critic of the libertarian Chicago School, and especially of Milton Friedman (writer of a rival Newsweek column). Markets are not perfect, he believed, and dire warnings from Friedman, and earlier from Friedrich von Hayek, about the regulation of markets “tells us something about them rather than something about Genghis Khan or Franklin Roosevelt. It is paranoid to warn against inevitable slippery slopes…once individual commercial freedoms are in any way infringed upon.”

As for Mr Samuelson's friend of 50 years, Alan Greenspan, once chairman of the Federal Reserve, “the trouble is that he had been an Ayn Rander”—a devotee of laissez-faire capitalism. “You can take the boy out of the cult but you can't take the cult out of the boy,” Mr Samuelson told the Atlantic this summer. “He actually had [an] instruction, probably pinned on the wall: ‘Nothing from this office should go forth which discredits the capitalist system. Greed is good'.”

The huge sales of Mr Samuelson's textbook, “Economics”, first published in 1948 and updated every three years, owed much to his lively writing. (The abstract of his recent memoir ended with the words: “Boo hoo.”) The book transformed how economics was—and is—taught around the world. If the earlier editions too readily believed that an economy could achieve equilibrium, that may have stemmed from the author's conviction that mathematics could be a useful tool for economists, and that economics had much to learn from physics and the laws of thermodynamics. Today it is fashionable to argue that economics was led astray by “physics envy”, which blinded it to the subtleties of human behaviour, yet after winning his Nobel prize in 1970 Mr Samuelson anticipated economists' current interest in biological systems by writing several papers on Mendelian dynamics.

The inefficient market

He was the last of the great general economists, making important contributions on trade, macroeconomics, public finance and consumer behaviour. Yet he decided, at around 50, that to remain academically competitive he had to specialise. Perhaps because it was close to his beloved mathematics, the specialist field he chose was financial economics.

His work helped lay the foundations for two of the field's biggest ideas: the efficient-market hypothesis and options pricing. In 1965 he published a paper explaining that in well-informed and competitive speculative markets, price movements over time will be essentially random—a concept at the heart of the efficient-market hypothesis later described in its full majesty by Eugene Fama, whom Mr Samuelson believed ought to win a Nobel prize. In the 1950s it was Mr Samuelson who had rediscovered the pioneering early work of Louis Bachelier, a French mathematician whose insights would later underpin the Black-Scholes option-pricing model; and it was Mr Samuelson who suggested the assumption, that share prices move according to geometric Brownian motion, which makes this model workable. Mr Samuelson remained close to Robert Merton, who won a Nobel for his work with Fischer Black and Myron Scholes on options pricing.

Yet Mr Samuelson also understood that beyond the ivory tower the conditions necessary for efficient markets rarely existed; they needed regulating. “To understand economics you need to know not only fundamentals but also its nuances,” Mr Samuelson would explain. “When someone preaches ‘Economics in one lesson' I advise: Go back for the second lesson.” The latest crisis (for which he felt some responsibility, since he had helped develop financial derivatives that company executives did not understand) proved that “free markets do not stabilise themselves. Zero regulating is vastly suboptimal to rational regulating. Libertarianism is its own worst enemy!”

Mr Samuelson was happy to be “linked with such Methuselah masters as Verdi” who did some of their best work in old age. He was able to do so, not least, because of his interest in evidence-based medicine. For decades he read the New England Journal of Medicine, and—noting a weakness in his male ancestors—he was an early adopter of cholesterol-reducing statin pills, as well as skimmed milk. His passion for “looking for theoretical understandings of empirical reality” may help explain his long life, as well as his lengthy list of achievements.